Indian e-commerce cart hits a plateau

Behind numerous headlines of a cash crunch hitting major Indian e-commerce companies, and their valuations being questioned, is a revelation not too many people are talking about.TNN | Updated: June 27, 2016, 13:14 IST

Behind numerous headlines of a cash crunch hitting major Indian e-commerce companies, and their valuations being questioned, is a revelation not too many people are talking about. Indian e-commerce was emblematic of frenetic growth until very recently, but the last six to eight months have seen the industry come to a grinding halt, making it an inflection point for all the players involved.

TOI accessed and analysed data for top e-tailers, which revealed that the online retail market stagnated between May 2015 and 2016 in terms of the value of goods sold. While in May last year, the e-commerce biggies clocked a gross merchandise value, or GMV, run rate of $9 billion, that number has only inched up to about $10 billion at the end of May this year, translating into an 11% annual growth. In December last year, the total GMV run rate had reached $10.5 billion on the back of the festive season, which typically sees a rush of discounting from all e-tailers.

GMV is overall sales on an online marketplace, excluding discounts and returns which are an integral part of the e-commerce market.

The data gleaned from primary research and vetted by multiple stakeholders in the industry indicated that Flipkart, the country's largest online retail player, has seen its GMV run rate stall at about $4 billion for almost a year, while an aggressive Amazon has gone from clocking $1 billion to $2.7 billion in gross sales. However, Amazon's operations in India only began three years ago and it's been gaining ground on a smaller base. What's worth noting is that Flipkart notched up a 400% growth the year before, when it's GMV zoomed from $1 billion to $4 billion, post which the numbers have gone flat. Gurgaon-based Snapdeal, on the other hand, has seen an almost 50% knock-down in sales numbers after similar highs it touched exactly a year ago. The company said as of June, its GMV run rate was more than $2.5 billion.

An email sent to Flipkart's spokesperson did not elicit a response till the time of going to press. In an earlier interaction with TOI, Amit Agarwal, Amazon's India head, had said the online retailer hadn't witnessed any signs of a slowdown and, instead, had grown shipments impressively at 150% in the first quarter of the calendar year.

E-commerce companies earn anywhere between 5% and 15% in commission from sellers, which makes up their revenue. GMV had been the key metric for all e-tailers in India to show rapid growth and ratchet up their valuations in multi-billion-dollar fund-raises over the past two years. But with sales staying flat or declining, most e-commerce players are now starting to focus on returning customers, which their founders keep stressing in media interactions. GMV run rate varied from month to month and is pretty jagged, depending on promotions and discounts that are available at the time. But the data collated by TOI points to a palpable slowdown for the first time after a heady period of growth.

Reduced Discounting Slowing Growth?

Post March this year, most e-tailers have reduced promotional campaigns after the Indian government introduced new policy guidelines for online marketplaces. The fresh rules prohibit online retailers from offering discounts directly. Cash burn for Amazon, for instance, had risen up to almost $80-90 million per month in the early part of the year - more than double of Flipkart's - but has since stabilized, people privy to the matter said. Amazon's Agarwal, when asked about it recently, did not give details on the mounting cash burn involved in weaning away Indian consumers from rivals.

An investor who has been tracking e-commerce says if the market has momentarily stopped growing, it's because online players have reduced investments into market development.

A slug of risk capital came into India's online commerce industry, with Flipkart leading the pack. Founded in 2007 as an online bookstore, the Bengaluru-based poster boy of India's thriving startup ecosystem scooped up $3.2 billion, a majority of the funding coming over the past two years, while Snapdeal collected $1.3 billion. The Jeff Bezos-led Amazon, too, has been pumping billions into India, the latest being a $3-billion investment announcement - taking its overall commitment for the country to $5 billion in three years of launching here.

Has Online Consumer Base Capped Out?

India's online shopping market, according to rough estimates, is 60-70 million, and is expected to go up to 100 million in the next few years. A notable spike happened in the past three years, but the divide between tier I and tier II cities is still very wide. The top 6-8 cities contribute 90% of sales for all the consumer internet players, including app-based cab aggregators like Ola and Uber.

In an earlier interaction with TOI, Binny Bansal, co-founder & CEO, Flipkart, said the e-commerce major was keenly looking at ways to tap into its existing base of users. "There are 50-60 million consumers buying online today. Given the large base, it makes sense to ensure you are selling more to the same customers as that opportunity is big enough compared to three years back," he had said.

Snapdeal's co-founder & CEO Kunal Bahl, too, has reiterated his focus on the e-tailer's high-value consumers, suggesting GMV was not the metric his company was chasing anymore. "Our GMV run rate continues to be healthy and above $2.5 billion. We are significantly focused on delivering the best experience, growing our net revenue which has increased three times in the last 12 months," a Snapdeal spokesperson said in an emailed response to TOI. GMV was described by many as a vanity metric during the past few years when e-commerce registered exponential growth.

"The moment of reckoning is coming or may have come already for Indian e-commerce companies. The ease with which these companies have been able to raise money from VCs may have made them all sloppy, and the test then will be which ones can now work on the 'building-a-business' channel. As for whether the fault lies with Indian consumers for not jumping fast enough onto the online wagon, it is a chicken-and-the-egg problem that we have to deal with," says Aswath Damodaran, professor of finance at the Stern School of Business at New York University.

What all of this will mean for online retailers is that from here on, raising new capital at present valuations will be a very tough proposition. Flipkart has been conserving cash and has substantially brought down its burn rate to wade through this phase of slow growth. Besides Amazon, there's Alibaba stitching up plans for a direct entry into e-commerce, making it a contest between the two global powerhouses and the Indian incumbents. The next one year will be extremely significant for the local online retailers as they go back to the basics and try to make their businesses self-sustaining while moving towards a tough path to profitability.